The gloves came off yesterday on Parliament’s first day back after its summer break, with Stephen Harper dealing the NDP what he evidently considers a fatal insult. According to the synchronized taunts of the Prime Minister and his Conservative minions, Her Majesty’s Loyal Opposition wants nothing more than to impose upon our struggling economy — brace yourselves, gentle Canadians — a carbon tax!
Thomas Mulcair and his New Democrats played their part flawlessly in Harper’s script by denying the government’s charge, pointing out they actually prefer another form of carbon pricing known as cap-and-trade. But, according to the impeccable logic of a Conservative Party “fact check,” “A ‘price on carbon’ is a tax on carbon. That makes it a carbon tax.” Never mind the commonly reported inconvenience that as recently as 2008, the Conservatives too favoured a cap-and-trade system.
So what exactly is the difference, if any, between these two carbon pricing mechanisms? They both seek to limit carbon dioxide emissions, and they both require emitters to pay for the privilege of emitting. The difference is in the order. With a carbon tax, government starts by setting a price, and in response to this economic incentive, polluters reduce their emissions. By contrast, under cap-and-trade, government starts by setting a cap, a maximum level of aggregate emissions, but polluters are free to buy and sell their emission permits amongst themselves for whatever price the market demands.
Both systems have their advantages. Cap-and-trade has the benefit of certainty. After all, the goal of all climate policy is to reduce carbon emissions — something which cap-and-trade does directly by dictating what the overall level of emissions must be, thereby eliminating the guesswork involved in setting a carbon tax. However, carbon taxes have the strength of being generally more broad-based than cap-and-trade. For logistical reasons, it is difficult to set up a cap-and-trade system among any but the largest of large polluters, meaning that most emissions will probably not be covered. By contrast, there is nothing easier than levying a tax. Carbon taxes therefore have at least the potential of applying to 100 percent of emissions.
In my opinion, the advantages of carbon taxation are stronger than those of cap-and-trade, but the devil is in the details. I would take a well-designed cap-and-trade system any day over a poorly designed carbon tax. The effectiveness of each policy depends on how high the tax is set, or how low the cap.
Falling right into Harper’s trap yesterday, Mulcair claimed he preferred cap-and-trade because carbon taxes are “regressive.” This is a common myth. The truth is that all measures to combat climate change — whether they take the form of a tax, emissions trading, or traditional command-and-control regulation — result in higher energy prices at the retail level. No matter who pays directly, businesses will always pass on as much of the cost to consumers as they can possibly get away with. The solution does not lie in making false promises that only “big polluters” will have to pay and no one else. Rather, it lies in offering tax credits or other forms of compensation to people with low and moderate incomes. I have written in the past about progressive carbon tax proposals which use the revenue generated to ensure that the poor are better off than they would be in the absence of such a tax. It is no less incumbent upon cap-and-trade advocates to design their plans in such a way that the burdens are distributed justly.
In conclusion, despite the similarities, cap-and-trade is not a carbon tax, and the Conservatives are wrong in their boastful chorus of accusations. Nevertheless, New Democrats are advised to grow a pair and not let Harper define the debate. We all need to recognize that a well-designed, progressive carbon tax could do the planet a hell of a lot of good.